Accidental Tax Break Saves Wealthiest Americans $100 Billion
bloomberg.com
bloomberg.com
>Covey, 84, a Missouri native and former U.S. Marine Corps basketball player who earned a law degree from Columbia Law School in 1955, uses the words “romantic” and “beautiful” to describe the most elegant tax maneuvers.
This guy is a hacker.
What I've always wondered is why people don't load the tax code into the automatic proof systems and let it do some goal seeking. The idea of putting money into a trust and then taking it out took a while to occur to Covey. All the "useless" edge cases would be explored by a goal seeking system. There are probably a large number of these hacks out there already discovered, but taking it all the way through to a tax court decision is the real trick. I also vaguely remember a legal principle that if a transaction was entered into soley for the purpose of lowering taxes, and with no other business goal, it can be disallowed unless that was the intent of Congress.
There have been a number of conferences over the years on the general topic of AI and the law. I once read in a general book on business strategy about how a contract can be either a sale or a lease, but that it is often extremely valuable to make a sale appear to be a lease, and vice versa. Lawyers will craft twenty pages of dense legalese to hide the facts from the casual reader. Someday a sophisticated text processing system will ingest a contract and give the answer, along with the chain of inferences from the obfuscated language (to show the judge).
This is nothing more than yet another case of legal treason by congress.
In my opinion, ALL loopholes for the super-wealthy and companies (Double Irish) should be closed.
Reducing taxes should not be an option. If you make huge amounts of money or want to transfer huge amounts of money in the United States then you should pay tax on it to the United States government. There shouldn't be the option to hire people to find sneaky ways to "legally" (but unethically) reduce that tax without any consequences.
Deleted comment
EDIT: I'm responding to this:
-----
I don't expect it to ever happen. Sometimes proposing an unreasonably extreme option will make other options (such as at least being proactive in closing the loopholes) seem tame.
I pay my taxes, but people who can afford the best financial planners and accountants get to avoid them, that just rubs me the wrong way. Some of the more dirty tricks such as funneling income through other countries have zero consequences though.
Any arguments why?
2. Create a massive, retroactive tax on something they did. Make sure it's big enough that they can't possibly pay it.
3. Why stop at retroactive taxes? Add in retroactive penalties and fees for late payment.
4. Confiscate whatever they have to pay the tax bill.
5. Charge them with tax avoidance for not paying those taxes, then throw them in jail.
It's pretty insane, but if you're going to allow laws to be changed retroactively then you're already into that territory.
All I'm proposing is a discussion on closing loopholes and how to prevent people from actively trying to take advantage of the United States unreasonably complex tax system. If you are suppose to pay X% of the income you make from transactions in the US or money transferred to heirs then you should pay that X%.
The law says that you have to pay X% when passing money to heirs. If my lawyers and accountants discover a way to reduce that amount because of a technicality, then why should that hold up in court?
If there was a loophole in the law that allowed me to murder someone if X conditions are met, should I be allowed to go free?
I see your point about why retroactive laws would be a slippery slope.
>> If you are suppose to pay X% of the income you make from transactions in the US or money transferred to heirs then you should pay that X%.
Just for fun, let's see if I can avoid that tax... 1) What if I transfer the money overseas, put it in a trust, then transfer control of the trust to my heirs? It's not a transaction in the US.
2) What if I create a tiny, worthless company, give my heirs all the stock, pay the miniscule taxes on that value, and then contrive to make the company worth more? eg, lend it a bunch of money at no interest, or buy a bunch of stock, or purchase a lot of whatever it ostensibly makes?
3) How about if I just buy a ton of life insurance on myself with my heirs as the beneficiaries? Sure, it'll cost a lot, but as long as the overhead is less than the tax bill it's a net win.
That's off the top of my head. Pay me a few millions bucks to do this and I guarantee I can do better. :)
> Isn't this why you would hope that congress would be a diverse group of rational and ethical people?
This is, to say the least, not a common viewpoint.
Put another way: there is an intrinsic moral responsibility to not murder, but there is not an intrinsic moral responsibility to pay taxes. One could imagine a country in which there were no taxes, and such a state would not be immoral. And those who lived there and did not pay taxes would not be viewed as immoral. But if this same country did not have an explicit statute outlawing murder, we would still call people who murdered others (e.g., killed for pleasure) immoral.
Given that we are morally obligated to pay taxes strictly on the virtue that a law exists that says "You must pay this tax", how is it morally problematic to determine what you owe under the legal structure that has imposed the tax? Your moral obligation is to pay the tax as it is defined, it is not your moral obligation to pay more tax than the tax code requires.
That seems to me to be an obvious tautology: you owe in taxes what the tax code says you owe. If the tax code allows you to limit your tax responsibility by moving money through trusts, so be it. It doesn't seem any different than parts of the tax code that limit your tax responsibility for buying a home, having kids, or making under a certain threshold of money.
Whether or not the tax code, as constituted, is fair, equitable, desirable, or is having its intended effect are fair questions. But calling people immoral because they find legally sanctioned ways to reduce their tax liabilities is troubling.
I don't make enough to really worry about these structures, but I can guarantee you that if I did I would do whatever I could to reduce my legal tax responsibility.
If we change murder to kill however then there are already conditions that allow you to go free when killing someone.
Tax avoidance isn't a crime (or even illegal.)
Tax evasion is a crime, but consists of concealing or misrepresenting material facts to avoid an assessment of liability, which isn't what your scenario presents.
Willful failure to pay taxes is also a crime, but mere inability isn't willfulness.
Your argument that retrospective taxes (which aren't retroactive unless the tax becomes due in the past) being a license for arbitrary imprisonment rests on a misrepresentation of criminal laws associated with taxes (and would require them to be applied in a manner not only inconsistent with existing law, but in a manner which I'm fairly certain has been held unconstitutional as a violation of due process rights even outside the context of retrospective taxation.)
I can't find a link right now but it was on CBS nightly news yesterday. The New York State government is suing thousands of small-business owners because they failed to recognize early that one of the legal, state-sanctioned trusts that was in charge of collecting and paying into the state's unemployment fund was (committing fraud and) failing, went belly up.
Based on what?
If you read the link I posted, these particular tax shelters are the result of large spreads between the interest rates used in certain IRS calculations, which are at historical lows for reasons unrelated to tax policy, and the actual achievable investment returns.
Deleted comment
Also, why would the IRS lobby congress? Their job is to enforce the laws, not to dictate what the laws should be.
This is completely unrealistic. The biggest issue is that you can't compel other countries to follow along. Half the rules in the commercial tax code are geared towards allowing companies to compete in the international world.
> I assure you that it was NOT accidental.
THis just seems foolish. No one person fully understands the tax code. If it was intended, why did people take so long to exploit it ? The law was passed in 1990, but no GRATS appeared anywhere near then. You are really, really stretching here.
Wealth is not a zero sum game, and all talk about the horrors of wealth inequality are completely ignorant of that fact. I think gift taxes are bullshit. If I earned and paid taxes on income/capital gains, I should be able to give the balance to whom ever I wish. Double taxation is bullshit.
I think gift taxes are bullshit.
If I earned and paid taxes on income/capital gains,
I should be able to give the balance to whom ever I wish.
1. It's spring 1997, life is good, you just got a huge bonus and decided to buy shares in a flailing tech company called Apple Computer.
2. With your $250,000 bonus, you buy 62,500 shares at $4/share.
3. You and your wife live a happy life and in 2013, you pass away, content with your impact on humanity. Fortunately your wife will be taken care of since you hadn't touched any of those Apple shares.
That stock is now worth $550/share, and your wife's 62,500 shares are worth $35 million. A gain of $34,750,000.
So your wife should get that $34mm without strings? Even though no tax was ever paid on it?
Double taxation is bullshit.
The number of times you're taxed should be irrelevant as long as it's fair and equitable.
if I understand correctly, you/your wife would have to pay capital
gains on the stock when it is sold
Because of this provision, any appreciation of the affected property
that occurred during the decedent's lifetime will never be taxed.
Thus, this provision provides an incentive for taxpayers to retain
appreciated property until death and sell depreciated property while
they are alive.
Hence why there's an estate tax.
[1] http://en.wikipedia.org/wiki/Stepped-up_basis
(Note: Wife may have been a bad example to start with due to legally shared property and all that, but this would be true if you left it to your children)
but don't hose a hard working farmer and
his family by nailing them with a 40% estate tax.
The Tax Policy Center found 20 (!) farms in the country that would have to pay any sort of estate tax, and the average tax paid by those 20 (out of several thousand farms) would be under 5%.[1]
- See Myth 5 - http://www.cbpp.org/cms/?fa=view&id=2655
Finally, how many hardworking farmers do you know that would just straight-up hand their kids something for nothing? If we are going to work with stereotypes like that, I would be willing to bet that the farmer would be happy to sell his successful farm to his kids for fair market value so they could work as hard as he did to make a living for their families.
Option B - Give money to a government who spends $5 to be able to spend $1. Then waistes that $1 (on polices that you don't agree with).
Option C - Give money to people who hate you for having money (a.k.a "trickle it down", "guaranteed minimal income", "anyone off the street can be a CEO", "lets retroactivly tax the rich", etc).
I know what I would do.
Option E - Realize that we have enough food and resources so that noone should have to do without, and create a society that reflects that.
Funny how these last two options contain the one option that will solve this problem permanently, and the one option that humanity always ends up at.
1. Murder them out of spite.
2. Make them shelter and feed the poor of the world, so the poor multiplies/reproduces geometrically, and requires geometrically more resources to shelter and feed.
You're making the mistake of assuming malice, while we're just talking about cold hard fact: people who amass a lot of power always lose it, if not by choice or natural death, then violently.
Do without what? What are people not able to get right now that they really need?
But don't worry, as usual, if you're rich enough, you play by a different set of rules and can hide your money in shell trusts and schemes and pay nothing. Disgusting - give us the FairTax already.
The rich pay less because they spend less as a proportion of their income than the middle classes.
The poor pay less because they are given exemptions, or a pay boost equivalent to the tax they pay.
The government needs the same amount of money and can you guess who gets to bear the brunt of that? That's right, the middle classes get to shoulder even more of the tax burden.
No thanks!
Yes but this is already happening right? Isn't it far easier for them to keep lobbying for new tax loopholes as older ones get closed, than it is to avoid a flat tax? Am I missing something?
> The poor pay less because they are given exemptions, or a pay boost equivalent to the tax they pay.
I've never heard about this. Can you give more details?
Not to the extent it would under "Fair Tax", no.
>> Isn't it far easier for them to keep lobbying for new tax loopholes as older ones get closed, than it is to avoid a flat tax? Am I missing something?
It makes it far easier for far more people at the higher end of the income scale to pay a lot less tax and codifies regressive taxation as the intent of law.
Make no mistake, the people who came up with the scheme would not be supporting it if they didn't stand to benefit from it, significantly. It puts their 'loophole' way out front and legitimises it.
>> I've never heard about this. Can you give more details?
Fundamental to the scheme is that the poor would get some sort of tax credit, possibly an annual payment, in order to offset the new sales tax, where previously they would have paid little to no income tax. This is not the part of the scheme I object to. The re-balancing of burden onto the middle classes, and in a way that affects those with lower incomes more than higher incomes, is why I think the scheme is a failure from its very conception.
You may have the kind of economic ethics that support a tax that declines as a percentage of income as income rises, or even argue that all people should pay the same lump sum in tax, that's up to you. Personally I can't get behind that.
Ok what percentage of their income do they pay now compared to what they would pay under Fair Tax?
What percentage of income do middle class households pay before and after a Fair Tax?
> It puts their 'loophole' way out front and legitimises it.
Yes but what happens when the government decides to increase the flat tax?
This is pretty irrelevant as we agree they're dodging now, and the Fair Tax would encode that as the law. Better to attempt to close the loopholes or imagine a third system than to move to a system that's regressive by design.
As for the general rule - the proposal requires a roughly 30% national sales tax. If I earn more then I spend less as a proportion of my earnings (this is a recorded economic phenomenon, not posturing), therefore my Fair Tax percentage is lower than people who earn less, even within similar socio-economic strata.
I'm not sure there's anything hard to understand here.
>> Yes but what happens when the government decides to increase the flat tax?
Not sure what you're driving at with this question. The obvious answer is "everyone pays more".
--edit-- If you don't think those on high incomes should pay the same or higher percentage of their income as those on lower earnings, that's a different argument entirely. I'm arguing that given the position that those on higher incomes should pay the same percentage or higher in tax as those on lower incomes Fair Tax is a bad idea. If your politics don't match to this assumption then you might as well say because we're not going to come to any sort of agreement!
I would strongly disagree. Conservative estimates say the wealthy pay an 18% tax rate. Less conservative estimates put it at around 10-11%. It does matter. It's a lot easier to lobby for new loopholes when everything is less transparent. What FairTax does is make things more transparent than they were before.
> Not sure what you're driving at with this question. The obvious answer is "everyone pays more".
Yes... including the extremely wealthy. It's very difficult to lobby for new loopholes against something is that is really easy to understand.
> If you don't think those on high incomes should pay the same or higher percentage of their income as those on lower earnings,
I agree with you. They should pay more. However I strongly disagree just going down the same path of closing loop holes. It doesn't work. The middle class isn't smart enough as a whole to organize and hire lobbyists. I'm just being realistic with what's possible before I get ancient.
The point-in-time adoption of a flat tax doesn't make it harder for them to lobby for tax loopholes after that adoption than it was before that adoption.
You can't compare flat tax to the status quo tax system on the assumption that in the former system the rich will magically lose their ability to lobby for changes to the existing tax code when nothing in the change proposed does anything to make that happen.
For sure, we aren't hurting. The only debt we have is the one-bedroom condo next to a highway and in the flight path of an airport we live in (well, and a car, but we could pay it off in cash tomorrow if need be, which would be stupid because the APR on the loan is less than 1%). But it's extremely frustrating that this condo would translate to a 5 bedroom house with an acre of land where I grew up a mere 3 hours from here.
And that's really only because, for the first 15 years of our careers we've lived within our means and have not had children. $150k is not what it's cracked up to be. If one of us lost our jobs, we would definitely have to move. Unfortunately, hers is tied to this area, so if it were me to lose the job, we'd be royally screwed.
And you have to define your terms here. What do you mean by "living"? If you mean, "able to feed themselves and live under a roof", that's not living, that's subsisting. I'm talking about being more than just a serf and actually making forward progress in life. Sure, the bartender at the insanely overpriced place a few blocks from us probably only makes $60k, but he also probably lives with a roommate in a tiny apartment, still owes money on a 7 year old car, has no assets, has no savings, has no health insurance, has no chance of retiring at ANY age.
At this point, I don't think there is anything within our current distance to her job (20 minutes) that A) we would be eligible for, and B) would be cheaper. I telecommute. If we both had to drive an hour to work, then we'd have to buy a second car and the increased transportation costs would certainly eclipse any savings in housing.
Mind you, an hour away in DC is 15 miles on a good day. There are people who work here for half of what we make, and they commute 2 hours to work every morning. I hope you're not suggesting that that is a livable scenario. "Well, it is for them." Maybe for them (I'd argue they are sending themselves to an early grave, but I digress), but not for society as a whole.
At that point, if we're living 2 hours away, we might as well be working for less where we lived. Thus my point: we can't live and work here for much less than we're already making.
Instead the gp is talking about a threshold of "rich enough" where you can roll your money into these GRATs and other investment vehicles. It requires a far greater level of wealth, because you're living on the returns from investments and financial objects entirely, and in order for those returns to be enough to live on, you need a much bigger chunk of money than 150k a year.
I understand that some poor and middle class people think it's unfair for rich people to keep increasing in wealth but the government is many times more corrupt than the average multi-millionaire or billionaire. First-generation wealthy people got that way by innovation, hard work, and filling a necessary role in the marketplace.
In summary, I don't think the solution to "income inequality" is to let the government have half of our money. They have proven time and again that they do not have the right solutions.
Make sense now?
While generational wealth of the magnitude we have today certainly isn't productive, it doesn't actually do anything to impede peoples' ability to earn more for themselves, and forcing the wealthy to fork over money when they die is basically purely symbolic, because even when taken cumulatively it has zero effect.
However, I still disagree with you. On a micro level, that is absolutely true, there is absolutely enough wealth to be created from different places that it is not a zero-sum game. That said, on a macro level, it is a zero-sum game. Your wealth had to come from someone somewhere else. Sheldon Adelson's came from people staying and gambling at his hotel. Mine comes from clients, and theirs comes from their customers. Your wealth is determined by the amount of money you can collect from other people. As far as I know, nobody is collecting wealth from a source that is not another human being. Well, except for the Federal Reserve, but that is a totally different topic.
Wealth can be created, destroyed, or transferred. You seem to be confusing "collecting" and "creating". Wealth is created by people doing things that manage to satisfy demand...it's the right combination of labor and capital. This can take many forms, whether it's a guy building a casino or a starting a social network or a law firm. These are forms of creation, not transfer (or what you seem to be referring to as "collecting"). Transfer is entirely a governmental endeavor, a social mechanism for redistribution of the wealth that's actually been created. There is no labor, capital, ideas, or hard work behind it.
You are correct, obviously, that wealth is created by people doing things that satisfy demand. For the purposes of our discussion, wealth is measured in dollars. Let's say there are two people on earth. One has 100 dollars, the other has 0 dollars. The person with zero dollars creates some widget that the dude with 100 dollars wants and charges the other guy 80 dollars for it. Guy 1 now has 20 dollars and guy 2 now has 80 dollars. Guy 2 created his wealth (his 80 dollars) by doing/building/whatever something that guy 1 wanted. Am I thinking about this too simply? How is it possible that wealth (measured in dollars) is introduced into an economy without it coming from another participant in the market?
Guy 2 (inventor) had to employ himself, other people, and capital in order to create the widget. He has to pay those people and the owners of the capital, and in turn they now have income which they do "stuff" with. Some of it's consumed (spent) and some is saved (invested), in each case having yet more downstream effects. Maybe Guy 2 realizes he can sell more widgets to more people but needs to employ more labor and capital in order to do so. Multiply this sort of ripple effect by a kajillion, every second of the day, and that's sort of how it works. It's never stagnant, and the more activity there is, generally speaking, the more wealth creation is taking place.
But in a capitalist world, nothing is stopping anyone from being Guy 2, which is kind of my original point.
I guess it breaks down for me when you actually bring dollars into the model. You are absolutely right, widgets made of resources come from the combination of those resources and ingenuity. However, in modern society, refined resources are quantified in terms of dollars and once dollars are part of the equation, it must be zero-sum because people cannot just create dollars for themselves to buy stuff. They must create stuff to convert into dollars so they can buy other stuff. You can absolutely create stuff from nothing, but that does not mean that anyone is going to buy it, which would convert it into dollar wealth.
Wealth is not fixed...repeat that 1,000 times. That's all that matters here. Capitalism is a system that allows people - anyone - to create wealth. Hell, look no farther than all these crazy tech companies coming public, the saas and social media revolutions or whatever. Why are they almost always US companies? Why isn't this stuff happening in Romania? We have a system that lets people create wealth for themelves no matter how rich others are, and it attracts talent and hard work and all that stuff, and it becomes a big virtuous circle.
Anyway, my point is just that wealth in this country isn't a real problem. It is not suppressive. It's the opposite, actually.
If there is one problem though, and this is something more recent, it's that with technology we all seem to have our faces rubbed in others' wealth. This is sort of a real problem...sort of. There are tons of really interesting behavioral economics studies that deal with this and show how it makes people feel worse about themselves. A topic for another day I suppose...
http://blog.figuringshitout.com/the-parable-of-the-fisherman...
I hate to break this to you, but you dont have the ability to "fundamentally disagree" on something like this. Put simply, you dont know what you're talking about. You obviously dont know anything about economics, and to the extent that you've read something it's clearly been selective in order to fit your worldview. You can disagree with me and be wrong if you insist on it, because these things you're saying are fundamentally and demonstrably wrong. You might as well tell me the sun rises in the west.
Many of the "poor" in our country are obese. That should tell you something. They aren't that poor. They have houses, cars, food, and clothing. Poor people can go to college for free (Pell Grant), eat for free (EBT), have housing for free (HUD), and get a check to pay for other living expenses (welfare). We have proven that providing all of these things to people with no strings attached does not lift them to a higher plane.
How will it help to take another billion dollars from a family who knows how to manage money and give it to a bunch of families who don't?
Well, for one thing, you are probably not neighbors if the income disparity is that wide. Secondly, you are really not comparing apples to apples. Someone making $100K/year is by no means poor. They make relatively less than someone making $10M, and they might be just as over-extended, but they can easily meet their basic needs, whereas somebody making $15K/year may have enormous difficulties doing so and as a result, might break into your car and steal your briefcase. That is how income disparities can affect your life.
The rest of your post is patently absurd. Food stamps in AZ amount to $160/month, and the maximum federal Pell Grant for this year is $5,645 [0]. For comparison, tuition for an in-state student at ASU at the college of engineering is $10k/year [1].
Not to mention that you cannot get sick or hurt, otherwise you are basically fucked. Are you suggesting that it is somehow easy to be poor?
0: http://blog.collegeup.org/maximum-federal-pell-grant-increas...
1: https://students.asu.edu/tuition/results?acad_year=2014&resi...
These are the kind of lazy ideas that get people in trouble. I emphasize lazy because to genuinely believe this is like playing a game of chess and only thinking one move ahead. Stop for a moment and seriously consider what kind of effects a theoretical wealth cap at $5-10 million would have. What are those ripple effects, the unintended consequences of this? Tell you what, and I mean this seriously and without derision, why dont you tell me what you think the big picture effects would be. Would it be all sunshine and roses? It's a worthwhile thought exercise.
Also, you are correct that I am in that demographic. I am not exactly sure why that is relevant, however.
That's pretty much what the estate tax is.
Because your children didn't earn it. They just won the lucky sperm lotto.
As a society, our policies should be structured to discourage the formation of a hereditary elite.
For those who prefer a visual perspective - http://demonocracy.info/infographics/usa/us_debt/us_debt.htm...
I'm not convinced focusing on these tiny (relatively) loopholes on the "world's richest", should be the focus of trying to fix the problem.
How much fucking money does someone need? Seriously. What is the difference between 7.9 billion (what he wants to leave) and 5.1 billion (less the existing estate tax of 2.8 billion)? Clearly, his ego is huge given that he watches the ranks of richest people closely. Honestly, what the fuck? Congratulations man, you got really fucking loaded. Good work. Now, please play fair.
</rant>
Even the rich folks that aren't trying to pass on a huge inheritance, such as Bill Gates and Warren Buffet, still aren't giving it to the government. They're giving it all to charity, which is undoubtedly generous of them but also lets them direct their wealth themselves rather than giving it to the tax man.
EDIT: You are absolutely right that the government spends money on stuff that I don't want, like bombs and wars, and I think it is extraordinarily generous that men like this give so very much to charity. However, I also believe that if we as a society have decided that there should be an estate tax, then there should be an estate tax and that the loophole should be closed.
I'm not arguing that there shouldn't be an estate tax, or that people shouldn't pay it. Just that I fully understand why they try to avoid it. I would probably do the same thing in their situation, and I suspect many others would as well.